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Billionaire's Fund Still Long India Despite Correction Fears

(Bloomberg) -- A fund backed by Indian billionaire Uday Kotak is continuing to invest in India’s buoyant equity market even as the $470 million firm’s chief executive officer said a significant correction could happen “any time.”

“We are net long even though the valuations are very uncomfortable,” said Venkat Subramanian, CEO of Infina Finance Ltd. “But I haven’t found any other way to make money. Being under invested or short is very expensive in this market.”

Domestic and overseas funds pumped a record $26 billion into Indian equities last year, cheered by a slew of reforms including a new nationwide sales tax and funding plan for state-run lenders. That helped the NSE Nifty 50 Index post multiple records and gain about 29 percent in 2017, while sending the rupee to its first annual gain in seven years.

“A 10 percent correction can happen any time -- without any trigger -- due to the prolonged nature of this bull market,” Subramanian said in an interview this month. “Whether it continues the slide from there or a quick rebound can happen is another matter. The rally would end with a screeching halt rather than a grinding one.”

Infina, a Mumbai-based long-short fund, is an investment company jointly owned by Kotak Mahindra Bank Ltd. and the Kotak family. It’s been making about 15 percent returns for the last eight years, in line with the fund’s mandate, according to Subramanian. The fund works with a mandate that restricts volatility and is not allowed to go net long beyond 40 percent of total trading positions, he said.

Shared Caution

India equity hedge funds that follow a long-short strategy without these restrictions rose an average 33 percent in 2017 after gaining about 6 percent in each of the previous two years, according to Eurekahedge Pte estimates.

The Nifty index is up about 2.5 percent this year while Kotak Mahindra Bank has climbed 1.7 percent.

Uday Kotak, who is also managing director of Kotak Mahindra Bank, appears to share Subramanian’s caution about the Indian market. In a New Year message to employees of the bank, he urged them to exercise restraint. “Fundamentally, something is amiss here. What appears to be too good to be true usually is!” he wrote.

Domestic Inflows

Strong domestic inflows into equity markets following sweeping policy changes over the past two years will taper off, according to Subramanian. However, what would sustain the rally is a possible cut in corporate taxes when the government announces its budget Feb. 1, he said.

Subramanian says that, ironically, the decision by Moody’s Investors Service to upgrade India’s sovereign rating in November coincided with the start of negative headwinds for the economy.

“Looking back we can say that Moody’s upgrade was a peak for India’s macro,” he said. “In the last few months we have gone from what looked like a Goldilocks kind of macro picture to one dented by higher inflation, weaker government balance sheet and rising interest rates.”